The ECB Digital Euro project and how it could affect the crypto market
The European Central Bank (ECB) has recently announced that it is planning to launch a digital version of the Euro. The investigation phase of the Digital Euro Project would last for about 24 months and focus on the design and distribution of the digital Euro.
According to the ECB, the digital Euro will be designed to complement cash and not replace it. Hence, it should be able to meet the requirements of Europeans, while preventing unlawful activities and any unwanted impact on monetary policies and financial stability.
What is the digital Euro?
A digital Euro is essentially an electronic version of Euro notes and coins. It will be like a digital wallet that citizens of the Euro Zone would be able to keep at the ECB. It’s thought that this could be safer than keeping your cash at established banks, which may fail, or holding cash, which could be lost or stolen.
The ECB cannot potentially run out of Euros. That means that digital Euros would be intrinsically safer than their private sector counterparts.
However, you may not be able to convert all your savings to digital Euros. Otherwise, the safety of the digital wallet could be so appealing that it could cause other commercial banks to run out of money. It is expected that there will be a cap on the number of digital Euros you can own. There could also be a penalty for holding digital Euros beyond the prescribed limit.
What is the purpose of the digital Euro?
The ECB is not in favor of entrusting digital payments to the private sector for fear of physical cash dwindling. For instance, the circulation of notes and coins in Sweden is declining year after year. More than 85% of the total population has access to online banking, the reason behind why only 2% of all transactions happen in cash. Digital currency is widely accepted in Sweden, which has also led to an increase in crypto trading.
The ECB is also concerned about digital payment providers such as Visa and Mastercard, which are not European companies. It has also raised concerns about how private digital payment provider companies use transaction data of European residents.
The news of Facebook proposing to launch its own cryptocurrency Diem in 2019 further accelerated the work on the digital Euro. Facebook’s plan to create its own digital currency was seen as a potential threat to the key purpose of the central banks.
According to Fabio Panetta, a member of the Executive Board of the ECB, “Over many centuries, the sovereign has provided its own currency to citizens as a symbol of stability, safety, and trust. Providing money as a public good is central to the mission of central banks.”
Residents of the Euro Zone area have costless access to a secure and globally accepted means of payment in the form of cash. They should have the same for online and digital payments as well. A digital euro would bring down the cost of transactions. It would encourage financial inclusion by making digital payments available to even those who don’t have any access to financial services. Another benefit of the digital Euro would be to enable users to make their purchases across all outlets and countries in the Euro Zone.
How could the digital Euro affect the crypto market?
The field of cryptocurrencies and crypto trading is getting increasingly crowded, with new players coming into the market regularly. As such, it is a common concern as to if there is room left for the digital Euro. It will still be a few more years before it sees its launch.
According to Euro News, one digital Euro will be worth one Euro and will be tied to the fiat Euro Zone currency. Its value would be backed by the ECB, and so it would not be as volatile as other digital currencies.
Many cryptocurrencies have come under the scrutiny of regulators due to their increased volatility. Bitcoin recorded a high of 55,000 Euros in April but has dropped by 50% due to the Chinese crackdown on crypto trading and mining.
Stablecoins are a type of cryptocurrency that is typically pegged to an asset such as the US dollar that does not change much in value. They are considered less volatile because they are pegged to traditional strong currencies.
Just like the ECB, other central banks are also looking at offering their own digital currency called Central Bank Digital Currencies (CBDC). CBDCs are considered a stable and risk-free alternative to cryptocurrencies. For example, the Bank of England is looking at launching the “Britcoin” and the Chinese central bank is proposing the “Renminbi.”
What does the future look like?
CBDCs are going to be the face of technological transformation and transactions in the coming decades. The Digital Euro Project launched by the ECB will focus on finding feasible solutions to ensure faster and energy-conscious usage of the digital Euro.
A digital euro would significantly affect the European and global economies. Second only to the US dollar, the Euro is one of the most traded currencies in the world. It’s also the official currency of 19 of the 27 member states of the European Union, with over 26 billion euro banknotes in circulation as of May 2021.
However, when it comes to digital currencies and crypto trading, the competition is growing. China has been working towards a digital Yuan since 2014 and the Bahamas has already launched its CBDC Sa